What is the correct answer?


Excess capacity is not found under:

A. Monopoly

B. Monopolistic competition

C. Perfect competition

D. Oligopoly

Correct Answer :

C. Perfect competition

Excess capacity refers to a situation where a firm is producing at a lower scale of output than it has been designed for. A firm has excess capacity if it produces less than the quantity at which ATC is a minimum. Firms in monopolistic competition operate with excess capacity in long-run equilibrium. The downwardsloping curve for the products in monopolistic competition is the cause of excess capacity. There is no excess capacity in perfect competition in the long-run. So, in monopolistic competition, output is less than the efficient scale of perfect competition. Excess capacity is a characteristic of natural monopoly and monopolistic competition. It may arise b/c as demand increases, firms have to invest and expand capacity in lumpy or indivisible portions. Firms may also choose to maintain excess capacity as a part of deliberate strategy to deter or prevent entry of new firms.}

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